US debt downgrade, S&P is missing the picture

Standard and Poor has downgraded the US credit rating. The move has shaken the financial world, and it was followed by harsh critics by the the White House and other political parties in the US. It is not the first time, indeed, credit rating agencies do come under fire over the years: in the most recent past, both S&P and Moodys have been fiercely attacked by European governments for their behavior in the Euro-crisis. It was the very first time, though, their (the credit rating agencies’) attention turned to the US, and reported a downgrade.

Amidst all the downgrade storm, one crucial point has been missing: why was it S&P, and not Moody’s or both agencies, which downgraded the US.

As a matter of fact, the two agencies don’t measure the same thing with their credit ratings procedures: S&P rates the probability of default, Moody’s expected losses; S&P does not pay attention to what the recovery value is, that is to the actual amount of money investors are going to receive from the issuer after the default has been declared and resolved, to Moody’s experts default probability is part of the total expected loss — but then you have to also take into account what’s likely to happen if and when a default occurs.

The difference, as it applies to the US sovereign credit rating, is enormous: No one doubts America’s ability to pay its debts, and if the US should ever find itself in a position where it’s forced by law to default on a bond payment, that default is certain to be only temporary. Bondholders would get all of their money, in full, within a couple of weeks, and probably within a few days.

S&P, that is the truth, misses the largest and most important part of the picture, the future, they only pay their attention to a given moment of temporary difficulties, regardless of any efforts the administrations involved might be takin into consideration, or enforcing.